For Google, a White-Knuckle Ride


By Sarah Lacy So far in its young life as a public company, Google's (GOOG) strong suit sure hasn't been subtlety. To gasps on Wall Street, the Mountain View (Calif.) Internet icon proposed an initial share price last summer of $108 to $135, before debuting at a more muted $85 on Aug. 19. That was just the beginning of what has been a wild ride.

Shares rocketed up 18% to close at $100.34 the first day of trading, then shot up again on Oct. 21, when Google announced third-quarter revenues of $503 million, eclipsing analyst expectations by 11%. Google shares peaked at $196.03 on Nov. 1.

SLIPPING AND SLIDING. Google-watchers braced for more volatility on Nov. 16, as the outfit's second "lockup" period expired, meaning 38.5 million shares owned by employees and early investors could be sold for the first time since the company's August IPO. That's almost double the 19.6 million shares offered when the stock debuted, and downward price pressure in the 3% or so range was widely expected.

Whoops. As it turned out, the price slid about 6.67%, closing on Nov. 16 at $172.55. With nearly 21 million shares trading hands, volume was substantially higher than the 9 million shares Google investors typically trade.

The decline was more than double what most IPOs experience once locked-up shares are released, says Mark Mahaney, analyst at American Technology Research in San Francisco. Since Nov. 1, Google stock has seen a 15% correction. Martin Pyykkonen, senior analyst at Janco Partners, a Greenwood Village City (Colo.) investment firm, thinks "this is a pretty good sign the upside in the stock is probably fairly limited." The real challenge, Pyykkonen believes, "will be to get this thing above $200."

BIGGER UPS AND DOWNS. That said, most of Google's swings in price have been more dramatic than your average IPO -- and disproportionately to the upside. According to Mahaney's research, the average IPO in 2003 was up 16.9% from its initial price to the lockup expiration. Google's price: up a whopping 103%.

The typical IPO traded down 1.8% on its lockup expiration from its price a month earlier, Mahaney has found. But Google shares were up 20%. The typical IPO traded down 2.4% on its lockup expiration from its price two weeks earlier, while Google has traded down 11%.

Not much of a pattern, except to suggest that Google is a highly volatile stock. In early after-hours trading on Nov. 16, it was already trading back up by 0.38%.

VOLATILITY TO THE MAX? Smart investors, take note: the ride isn't over yet. The vast majority of IPOs have a single lockup expiration 180 days after the IPO. But Google -- ever the maverick -- set up five staggered lockup expirations. The first one, on Sept. 2, had little impact. Only 4.7 million shares were released; shares ended the day up 1.26%, at $101.51. Today's expiration was the second and also the second-largest number of shares, to be followed by 24.9 million shares on both Dec. 16 and Jan. 15.

Analysts expect more of the same volatility until Feb. 14, the last and largest of Google's lockup expirations. On that day, in lieu of valentine cards, employees and early investors will have the chance to trade some 176.8 million shares.

If Nov. 16 is any indication, the Valentine's Day lockup may be the most volatile of all, says Pyykkonen. "If nothing changes between now and then, this could indicate a downward day or couple of days and a lot of volume in February," he says.

SEARCH-AD ESTIMATES. The good news? After February, 2005, rough waters likely will start to calm. The lockups will finally be behind Google -- and answers to deeper questions about the business and stock price may start to emerge. Among them: Have the stock-price fluctuations been so hot and heavy because of the relatively small float of shares? Will the price stabilize once big institutions are able to load up on shares?

By then, Google will have two quarters as a public company under its belt. Analysts doubt Google will be very forthcoming with 2005 estimates, but at least broader estimates on the state of paid-search advertising will be available. By Google standards, it all looks a little boring. Until those figures materialize, Google investors will need to hang on tight -- and avoid looking down. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau


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